Children display Palestinian flags at a rally near Ramallah. A poll found their parents’ priorities were now health, education, water supplies and jobs, rather than talks with Israel. Photograph: Issam Rimami/Rex Features

The Chinese-made parking meter on a street in the West Bank city of Ramallah instructed motorists in Arabic and English to "pay here", warning that surveillance cameras were watching their cars around the clock to catch those flouting the order.

But of the 17 cars parked in the street one day this week, not a single one displayed a ticket. "I actually used to buy a ticket, but I stopped when I realised I was the only one paying," said one Palestinian motorist who declined to give his name. "I know it's wrong, but regulations have to have teeth. And if you pay, you need services in return."

The parking meters, which appeared last year, are one of the more unwelcome consequences of the Palestinian Authority's efforts to build an embryonic state. Other painful developments have included a steep rise in taxes, import duties that have resulted in higher prices, and the imposition of planning and construction regulations and fees.

But there have also been benefits to the PA's two-year programme to create and reinforce the institutions of a state. Law and order has been dramatically improved, albeit at the considerable price of some repressive measures, roads have been built and improved, schools and colleges have seen investment and housing projects are under construction.

Some plans seem over-ambitious, although perhaps intended to inspire the future citizens of the nascent state. A Palestine international airport is mooted; an artist-designed entry stamp is circulating on the internet; and Jihad al-Wazir, the governor of the Palestinian monetary authority, has floated the idea of reissuing the defunct Palestine pound to replace the Israeli shekel as the national currency.

But the real achievements of Salam Fayyad, the Palestinian prime minister and driving force behind the state-building exercise, have been lavishly praised – mainly, it must be said, by those who don't actually live in the West Bank. Fayyad has publicly stated that the preparatory work will be completed and the PA will be in position to launch a state by 26 August, less than six weeks away.

The deadline, which the PA imposed on itself two years ago, is critical: a little more than two weeks later the 66th session of the UN general assembly will open and the question of whether to recognise a state of Palestine may be the most significant and divisive issue it faces.

But it is not yet certain that a resolution to recognise a Palestinian state will be brought before the general assembly. There are many diplomatic and bureaucratic hurdles to navigate, many strategic and tactical issues to consider, and – if the Palestinians do go ahead with their plan – the wrath of the United States to face.

The Obama administration has declared its opposition to such a move and its intention to veto any motion brought before the security council. The Palestinians, who believe they have the support of about 130 of the UN's 193 states and need a two-thirds majority to approve a motion, are angry at the US position but also fearful of the consequences of defiance.

The US for its part is trying – without success so far – to bring both sides back to the negotiating table, the only place, in its view, that the decades-long conflict can be resolved.

Some Palestinian observers believe the PA leadership, despite its robust statements committing to the UN approach, may also be quietly seeking a way to "climb down the tree".

"The Palestinian leadership has repeatedly indicated that, if the US comes up with an acceptable formula, then they'll go back to the negotiating table," said Mouin Rabbani, an independent Middle East analyst. "At this point they're demanding nothing more than the US putting forward the terms of the Obama speech [a Palestinian state based on the pre-1967 lines with agreed land swaps] and for the Israelis to accept that. But the US has not even been willing or able to insist on that." Apart from other considerations, President Barack Obama is unwilling to risk alienating the pro-Israel lobby before next year's US election.

The Palestinian leadership, which embarked on the UN strategy as a means of increasing its leverage in talks, was thus being forced to pursue an alternative to negotiations, Rabbani said. The consequences could be far-reaching. "This represents the process of a gradual but irreversible disengagement by Palestinians of US-sponsored bilateral negotiations, the basis of which has been Israeli interests."

However, Diana Butto, a former legal adviser to Palestinian negotiators, said she expected a retreat from the UN strategy. "They [the Palestinian leadership] climb up trees and don't know how to get down, except by falling out of the tree."

The PA, she said, had not thought through what it hoped to achieve by pursuing the UN approach. "There is a lack of imagination. Pursuing statehood is just a tactic to strengthen its hand in negotiations." Statehood should, for example, enable the Palestinians to challenge Israeli policies and actions at the international court of justice, she said.

The Palestinian bid, which was last week given formal backing by the Arab League, has triggered alarm in Israel. The Israeli foreign ministry has instructed its diplomats across the world, and particularly in western Europe, to lobby against recognition. "The Palestinian effort must be referred to as a process that erodes the legitimacy of the state of Israel," a cable sent to all ambassadors said.

It has sought to characterise a vote in favour of recognition of a Palestinian state as an act that threatens Israel's very existence, and it has threatened to renounce previous agreements – principally the Oslo accords, under which the PA was established – if the Palestinians press ahead with the UN approach.

"Israel sees this as part of a broader turning of the tide against its control in the occupied territories," said Rabbani. "It is looking at both the immediate and longer-term consequences."

Israeli occupation of a sovereign state, as opposed to Palestinian territory, would come under increasing international pressure, say analysts. There have even been suggestions that Israel could respond by annexing its major settlements while withdrawing from the rest of the West Bank.

It is easy to understand why the US is keen to avoid a situation where it would both be seen as a major block to Palestinian statehood and have to deal with the consequences. The stance of the 27 EU countries, currently divided over recognition, is seen as crucial.

Some European diplomats, alarmed at the prospect of an EU split, are trying to persuade the Palestinians to pursue a more "unifying" resolution at the UN, which refers to the pre-1967 lines as the basis of a state while falling short of immediate recognition.

At the moment, the British government's position is ambiguous. It has indicated that, unless there is a return to meaningful negotiations, it may back the Palestinian move – which would be an enormous boost to the Palestinian cause and a major blow to Israel. The US sees Britain's position as useful while it is trying to get the two sides back to negotiations but, if it came to a vote, it would want Britain to back the US line.

According to Rabbani, in terms of international opinion "the Palestinians are in the best position they've been in for decades, if not ever". However, the danger is that they will miss the opportunity to harness that support to a popular mobilisation of their own people, he added.

There has been much talk over recent months of a new non-violent resistance, a third intifada and the emergence of new forms of activism – the ripples of the Arab spring reaching the West Bank and Gaza. The view that if the bid for statehood fails – or if it succeeds but nothing significant changes on the ground – the Palestinians will rise up has considerable currency. Yet, despite the border breaches in May and June and pockets of resistance, particularly in east Jerusalem, there is little sign as yet of rising temperatures.

A recent opinion survey carried out in Gaza and the West Bank by the respected US pollster Stanley Greenberg found that at the top of the priority list for Palestinians were jobs, healthcare, water shortages and education. Mass protests against Israel, and even pursuing peace negotiations, came way down. Asked to choose, two-thirds favoured diplomatic engagement with Israel over violence.

Round the corner from the Ramallah parking meter, Adel Abu Mariam considered the possible outcomes of the Palestinian bid for statehood while minding his vegetable shop. "If the US has the will to make it successful, it will succeed," he said. "And if it fails, maybe people will be angry for a couple of days, but then life will go on. We have no strength for a new intifada. People know what happened before."